Speaker 1: Welcome to Kobe Time, a podcast series on Markets and
Speaker 1: Economies from D BS Group Research. I'm Tam Rbe, chief economist.
Speaker 1: Welcoming you to our 135th episode today. We will welcome
Speaker 1: back Alexander Capri to the podcast. Alex is a writer,
Speaker 1: academic and former partner in the Asia Pacific Practice of KPMG.
Speaker 1: He has done a lot of work on global value chains,
Speaker 1: trade and geopolitics, Global tech, the digital economy and the
Speaker 1: industries of the future.
Speaker 1: Alex has recently published a book Techno Nationalism, how it's
Speaker 1: reshaping trade, geopolitics and society. Alexander Capri, a warm welcome
Speaker 1: back to Copy time. Thank you. It's great to have you, Alex.
Speaker 1: We did this once before back in April 2020 just
Speaker 1: as we were being engulfed by the global pandemic. Alex.
Speaker 1: When I look at the transcript of that conversation, I
Speaker 1: think we kind of had it right. We talked over
Speaker 1: the push and pull factors driving the realignment of the
Speaker 1: global supply chain.
Speaker 1: Uh We asserted barely a couple of months into the
Speaker 1: pandemic that the crisis would provide additional motivation to lean
Speaker 1: toward resiliency over efficiency. Well, those issues remain alive today, Alex,
Speaker 1: and you've written a lot rather large book on it.
Speaker 1: So let's start, how do you define techno nationalism?
Speaker 2: Good question.
Speaker 2: Uh II, I would say that we would throw in
Speaker 2: a few other words. Uh So let, let's start with
Speaker 2: geo economics, right? If we're thinking about supply chains, let's
Speaker 2: replace uh just in time with, just in case. Uh
Speaker 2: you know, if, if we're thinking about a purely cost
Speaker 2: driven model that seeks efficiencies and hyper rationalized supply chains, now,
Speaker 2: geo poli geopolitics and other issues stemming from great power
Speaker 2: competition
Speaker 2: are now factoring into how a supply chain is structured.
Speaker 2: Um You know, where a manufacturing process is going to
Speaker 2: take place, how a strategic partner is chosen. Um So,
Speaker 2: so I I would break down techno nationalism into six
Speaker 2: very distinct elements.
Speaker 2: Um The first is uh supply chains. So supply chain weaponization,
Speaker 2: governments looking to control or stem the flow of technology
Speaker 2: to perceived adversaries and that happens through things like export controls,
Speaker 2: ah the imposition of sanctions. Um Then I would, I
Speaker 2: would break it down into uh decoupling and Deris. And
Speaker 2: if decoupling and deris is happening, then we're looking at
Speaker 2: reshoring near shoring friend, shoring
Speaker 2: uh from, from a sort of a G to G basis.
Speaker 2: Um And even a G to B basis. We're looking
Speaker 2: at government driven innovation, industrial policy if you will. Uh
Speaker 2: we're also looking at um an increase in basically, frankly,
Speaker 2: you know, hybrid warfare, right? We're looking at espionage. We're
Speaker 2: looking at uh elevation of cyber intrusions, that sort of thing.
Speaker 2: And then the final element would be uh basically what
Speaker 2: we call tech uh diplomacy, right? So governments working with
Speaker 2: other governments and working with businesses to forge these new
Speaker 2: strategic alliances around strategic technologies.
Speaker 1: Why is it just not nationalism? Why is it techno nationalism?
Speaker 2: Because uh technology is a power multiplier. And so if
Speaker 2: we put this in the context of a a nation,
Speaker 2: a nation state uh technology, I, if we're putting this
Speaker 2: in the terms of techno nationalism ah is about the
Speaker 2: linkage between the technological prowess of a particular country or
Speaker 2: organizations within that country
Speaker 2: and their ability to project national security and, and, and
Speaker 2: defense related uh power, uh the linkage to economic strength, prosperity.
Speaker 2: And then finally, really, there's a third element which is
Speaker 2: societal and that is uh you know, as technology becomes
Speaker 2: uh essential to controlling narratives, to releasing information or disinformation
Speaker 2: uh towards uh in, in uh authoritarian regimes, towards uh
Speaker 2: suppression of populations, censorship that, that sort of thing. Technology
Speaker 2: is central to all of that. And so all of
Speaker 2: these would be power multipliers.
Speaker 1: Is this a brand new thing that basically goes back
Speaker 1: to Donald Trump, becoming the president of the United States
Speaker 1: or it's been going on for long before that,
Speaker 2: as long as there as there have been nation states,
Speaker 2: there has been techno nationalism.
Speaker 2: Ah So, for example, in the book I talk about
Speaker 2: the founding of the United States. Uh Alexander Hamilton, first
Speaker 2: Secretary of the Treasury, really one of his top priorities,
Speaker 2: if not, the top priority was to get access to
Speaker 2: British technology when it, when it came to the, you know,
Speaker 2: textile milling machines and, and, and so on. So, um
Speaker 1: and there were adversaries at that time, so you basically
Speaker 1: had to steal it
Speaker 2: and that's precisely what happened. I mean, that was really
Speaker 2: item number one on the agenda was, you know, steal, acquire,
Speaker 2: figure out how to get access to technology. So, um
Speaker 2: that sort of if you want to, let's just stick
Speaker 2: with the term techno nationalist uh approach to, to real
Speaker 2: politik and, and, and international relations, ah has been around
Speaker 2: for a very long time.
Speaker 1: It's fascinating and I think going back to the Cold
Speaker 1: War era, some would argue that some of the decoupling
Speaker 1: that happened between the US and Russia put Russia under
Speaker 1: a lot of economic strike because they had to sort
Speaker 1: of create homegrown tech stack, which was never really good.
Speaker 1: Enough incentives were not aligned. And that was one of
Speaker 1: the key elements that drove the victory if you will,
Speaker 1: the Cold War in favor of the West over the
Speaker 1: Soviet bloc.
Speaker 2: Yeah, I mean, that's a, that's a widely held view.
Speaker 2: Um I, I certainly, I, I certainly would, would say
Speaker 2: that um the amount of, of resources that, that, that
Speaker 2: needs to go into uh you know, pushing the, the
Speaker 2: envelope if you will from a technological standpoint and the,
Speaker 2: the idea that um the, for example, the, the Star
Speaker 2: Wars system that the Reagan administration uh was pushing whether
Speaker 2: or not it was e even feasible.
Speaker 2: Uh you know, the, the theory is, is, is that
Speaker 2: it bankrupted the, the Soviets because they thought it was,
Speaker 2: and they were putting a lot of, you know, time
Speaker 2: and effort and money into it. And, and of course,
Speaker 2: you know, they, they it, it helped in the collapse. So,
Speaker 2: um
Speaker 2: but from a techno nationalist standpoint, uh if you look
Speaker 2: at really, if you go back 100 years, uh and
Speaker 2: let's go back to the first World War, right? I mean,
Speaker 2: there were chemistry wars, right? To figure out how to,
Speaker 2: how to produce nitrates, to produce uh explosives, for example, right?
Speaker 2: And that, that was really the war of the scientists,
Speaker 2: right to come up with those innovations. And if you
Speaker 2: trace this theme of techno nationalism really back the last
Speaker 2: 100 years plus, um
Speaker 2: there really is this very important correlation between the industrial
Speaker 2: revolutions
Speaker 2: and uh and what what I call the technology feedback loop,
Speaker 2: which is essentially this virtuous cycle that exists between um
Speaker 2: you know, governments, national governments, the defense establishment, academia,
Speaker 2: private business and or markets. Uh and as they all
Speaker 2: work together, uh you have this phenomenon where you have
Speaker 2: innovation taking place, uh it's, it's generating profit, it's generating
Speaker 2: more innovation, which it becomes a network effect sort of thing.
Speaker 2: So if you, if, if you look at this, this
Speaker 2: view of the world that some have described as, um
Speaker 2: the west versus the rest,
Speaker 2: uh you know, going back really 3, 400 years. Uh
Speaker 2: I mean, we could trace this all the way back
Speaker 2: to the Dutch East India company, right. And that, that
Speaker 2: sort of symbiotic relationship that emerged between the state and
Speaker 2: a for profit organization and all those elements in the
Speaker 2: feedback loop, right? But if you, if you project forward
Speaker 2: um
Speaker 2: that has combined with the, now we're in the fourth
Speaker 2: industrial revolution. But when you, when you, when you look
Speaker 2: at the fortuitous results of the industrial revolutions, the technology
Speaker 2: feedback loop
Speaker 2: uh on a nation state level that has essentially laid the,
Speaker 2: laid the groundwork for the international system as we see
Speaker 2: it today,
Speaker 1: right? Uh Alex, I want to get one thing clear,
Speaker 1: which is when you are referring to techno nationalism and
Speaker 1: especially when I think about the totality of the measures
Speaker 1: that particularly the US has taken against China in the
Speaker 1: last decade or so. A lot of it is
Speaker 1: rationalize under the guise of national security. We don't want
Speaker 1: our data to fall into the wrong hands. We don't
Speaker 1: want our technology to be weaponized in an armed conflict
Speaker 1: or something like that by our adversaries. But it seems
Speaker 1: to me that you, when you take this big historical sweep,
Speaker 1: you're also putting it in the context of economic security.
Speaker 1: I don't want you to rise to my level of
Speaker 1: economic prosperity and I would sort of prevent you from
Speaker 1: rising to some extent. Yeah,
Speaker 2: I, I
Speaker 2: think that's, that's somewhat of a zero sum view. Right? And,
Speaker 2: and I actually don't think that, that techno nationalism puts
Speaker 2: us in a world of zero sum. Right? I think
Speaker 2: the world has become way too complex right now, too
Speaker 2: many overlapping interests. And, and we're actually in a paradox.
Speaker 2: So the paradox is this,
Speaker 2: if you look at the, if you look at the
Speaker 2: grand sort of the mega trends that are defining the
Speaker 2: international system today, right? Um you know, you look at
Speaker 2: uh the fragmentation of a global supply chains because of
Speaker 2: geopolitical pressures, right? This move towards regionalization, even localization. Um
Speaker 2: the the the the idea that uh the world is bifurcating,
Speaker 2: right um around these, these two nodes, right? That basically
Speaker 2: the GSG G7 US plus plus China, I mean, if
Speaker 2: if you look at that, um
Speaker 2: we're not de globalizing, this is not a de globalization process,
Speaker 2: this is a reorganization process. So the global economy is,
Speaker 2: is reorganizing itself and it's, it's, it's a correction if
Speaker 2: you will. Um III I actually refer to it um
Speaker 2: as a geopolitical version of creative destruction. All right. So
Speaker 2: there, there is a, there there are many new economic
Speaker 2: opportunities that are rising as, you know, as a banker.
Speaker 2: Uh and the work that, that the bank is doing,
Speaker 2: you know, that, that, that when you have these shifts
Speaker 2: in supply chains in, in global value chains, um
Speaker 2: there's rebuilding, there's restructuring, there's, there's the services industry, you know, there, there's, it's,
Speaker 2: it's a real knock on effect. And I should point
Speaker 2: out the paradox that I that I refer to is
Speaker 2: that on one hand, we have all of these things
Speaker 2: that I've just described happening with strategic technologies. So, so
Speaker 2: the value chains around there's really 12 core technologies and
Speaker 2: we can get back into that in a little bit
Speaker 2: of course, semiconductors, quantum biotech, you know that sort of thing.
Speaker 2: Um
Speaker 2: But even as that's happening, even even as we're seeing
Speaker 2: this bifurcation, we're seeing increases in trade volumes including between
Speaker 2: the US and China, right? So um
Speaker 2: the way I look at that, the way I dissect
Speaker 2: that is I look at global value chains as a,
Speaker 2: as a sort of a striation like three levels. OK.
Speaker 2: So on the top level, we have all the strategic goods, right?
Speaker 2: And that's where that's where the decoupling and the deris
Speaker 2: is happening, the restructuring and so forth in the middle,
Speaker 2: the second, the second layer down, we have this nebulous
Speaker 2: gray area.
Speaker 2: And uh within that gray area, we have uh dual
Speaker 2: use goods. So these are commercial goods that are used
Speaker 2: for a wide array of industries and sectors, you know,
Speaker 2: everything from a SIM card in your phone, literally to
Speaker 2: the brake pads in the car you're driving. But they
Speaker 2: could be considered dual use, meaning they're commercial, but they
Speaker 2: could be used for military purposes. And therefore, if they're
Speaker 2: being sent
Speaker 2: to um you know, an identified entity, a blacklisted entity somewhere,
Speaker 2: it's going to require an export license or it's just
Speaker 2: gonna be blocked throughout, that's the real gray area. And
Speaker 2: that's really where the scenario mapping and the the the
Speaker 2: really serious analysis has to take place if you're a
Speaker 2: company
Speaker 2: and then the and then the third level is just
Speaker 2: the the rest of the stuff. Uh that is essentially innocuous, right?
Speaker 2: I mean, do we care where your shoes come from?
Speaker 2: You know, your bottle of shampoo, you know, that type
Speaker 2: of thing.
Speaker 1: But even that evolves Alex, I'll give you an example
Speaker 1: five years ago. If you bought an Osim massage chair,
Speaker 1: it'd give you a massage. Today's Osim chairs have Bluetooth
Speaker 1: capability and you can connect to your phone and you
Speaker 1: can run the chair through your phone. So all of
Speaker 1: a sudden now it has
Speaker 1: mini Bluetooth application and data transmission capabilities. So then it
Speaker 1: starts going on from the third, completely innocuous. A chair
Speaker 1: that does no harm. That's right to somewhere in the middle.
Speaker 1: I guess that's where lawyers and regulators and consultants. Everybody
Speaker 1: come in and they fight it out to the company
Speaker 1: gets a buy or not.
Speaker 2: That's right.
Speaker 2: And so if you take, uh if you take a
Speaker 2: dual use technology that's in a, a fairly ubiquitous kind
Speaker 2: of product that everybody buys. And then there's this uh
Speaker 2: a sudden geopolitical event, uh an accidental flare up in
Speaker 2: the South China Sea or some kind of an event.
Speaker 2: It's quite possible that literally overnight,
Speaker 2: ah what was a commercial, what was considered purely a
Speaker 2: commercial good going to a particular importer or buyer in
Speaker 2: say China um is now off limits,
Speaker 2: right? And so, I mean, these are the types of
Speaker 2: things that companies need to be uh mapping out, right?
Speaker 2: They need to be looking at what parts of their
Speaker 2: supply chain are in this gray dual use area and
Speaker 2: given different scenarios in the world, what would happen if
Speaker 2: you know, scenario one, scenario two, perfect example of that
Speaker 2: is um electric vehicles
Speaker 2: and all of the, you know, w what is an
Speaker 2: electric vehicle, right? It's, it's, it's a computer on wheels, right?
Speaker 2: And it's, it's, it's sending and receiving information not only
Speaker 2: about where you're going but everything that's around you. Uh
Speaker 2: what's coming in on communication networks and other smart devices.
Speaker 2: And as you saw, I think it was just yesterday
Speaker 2: that Washington has announced that both the software and the
Speaker 2: hardware that goes into electric vehicles in the states cannot
Speaker 2: be of Chinese origin,
Speaker 1: right? So no export and no import around those things.
Speaker 2: Yeah, so
Speaker 2: that's an example of how in anything that's considered strategic,
Speaker 2: we're going, we're going to continue to see a very
Speaker 2: clear bifurcation of supply chains, value chains.
Speaker 1: Uh Maybe this question is too early to ask. But
Speaker 1: since you were talking about it, it sort of follows
Speaker 1: to me almost naturally do these restrictions work.
Speaker 1: You know, a semiconductor is super tiny, a lot of
Speaker 1: stuff just are uploaded and transmitted through the cloud over
Speaker 1: the air. It's not a question of a Department of
Speaker 1: Commerce inspectors sitting in Vietnam or somewhere else and making
Speaker 1: sure that everything is up and up.
Speaker 1: Um What has, what is the report card so far?
Speaker 2: Well, look export controls, le le let's start historically, I'll, I'll,
Speaker 2: I'll give you the answer historically and then, and then
Speaker 2: maybe we can apply it to say semiconductor today, right?
Speaker 2: What's what's going on? So historically,
Speaker 2: the record shows that um an export control will slow
Speaker 2: down the transmission or the, you know, the, the the
Speaker 2: dissemination of a certain kind of technology, but it's not
Speaker 2: going to stop it eventually. Um You know, it's, it's
Speaker 2: going to make its way into sort of the, the,
Speaker 2: the broader environment. Now,
Speaker 2: we also have to be careful about what kinds of
Speaker 2: technology we're talking about. So if we're talking about satellite technology,
Speaker 2: which in the, in the eighties, you know, the eighties
Speaker 2: and nineties there were controls, but eventually everybody figured out
Speaker 2: how to make satellites. Um That's one thing. But if
Speaker 2: we're talking about making a two nanometer chip
Speaker 2: where the barriers to entry are so incredibly
Speaker 2: high,
Speaker 1: basically one company makes it or
Speaker 2: or you know, it's it's right. So in the case
Speaker 2: of one company, you're probably talking about a SML which
Speaker 2: which makes the lithography lithography equipment.
Speaker 2: But even beyond that, within that, within that value chain,
Speaker 2: within that fabrication process, the the hyper specialization and the
Speaker 2: companies that specialize in that. So it's it's essentially with,
Speaker 2: in that case, we're we're looking at the emergence of
Speaker 2: a cartel, right. We're looking at the emergence of a
Speaker 2: chip cartel along geopolitical lines, right? So to answer the question,
Speaker 2: do do export controls work.
Speaker 2: Uh it's two fold, it depends how sophisticated the technology
Speaker 2: is and, and how, how high the barriers to entry are.
Speaker 2: But it also um it it also comes down to
Speaker 2: um how can these export controls be circumvented? What are
Speaker 2: the workarounds? What are the back doors and to that effect,
Speaker 2: there are quite a few, right? So let's let's talk
Speaker 2: about NVIDIA, nvidia's A I chips, right?
Speaker 2: So ex you know, export controls on them. Are they
Speaker 2: continuing to make their way into China, for example? And
Speaker 2: the answer is yes um uh you know, are ex
Speaker 2: and how, how is that happening? There's there's a few
Speaker 2: ways that's happening. The first is the export control process
Speaker 2: itself
Speaker 2: and the way it works is before an export control
Speaker 2: is actually enforced and it becomes mandatory to get a license.
Speaker 2: There's this long period where they make an announcement where
Speaker 2: they say yes, we're uh you know, it's a public,
Speaker 2: it's a public announcement process. We're, we're going to uh
Speaker 2: be implementing export controls and it's going to take effect
Speaker 2: in such and such time. So what does that do?
Speaker 2: Uh that incites a AAA binge buying sessions, right. So
Speaker 2: to load all the purchases as much as possible, I mean,
Speaker 2: just soak up everything that's out on the market, stockpile
Speaker 2: it and you've got chips for the next two years.
Speaker 2: That's what Huawei did when they were placed on the
Speaker 2: entity list, the the the Chinese telecommunications equipment manufacturing company.
Speaker 2: Um
Speaker 2: So there's, there's that, so there's the, the issue that
Speaker 2: everybody goes out in stockpiles. And we're seeing that now
Speaker 2: with uh DUV uh deep ultraviolet lithography machines uh being stockpiled.
Speaker 2: Uh you know, in China, right? The huge, huge, you know,
Speaker 2: spikes in, in, in the numbers going up because
Speaker 1: the EU vs are not available at all. The
Speaker 2: EU vs which is the extreme ultraviolet. Uh But the
Speaker 2: Duvs um um are are being basically purchased because
Speaker 2: um you know, just to divert a little bit. Um So,
Speaker 2: so Huawei worked with SMIC uh and they came up
Speaker 2: with a seven nanometer chip using uh imported DUV equipment. Basically,
Speaker 2: they used that for the, the, the mate 60 phone
Speaker 2: which was
Speaker 1: not considered likely, but they pull it off,
Speaker 2: they, they pulled it off. But again, if you look,
Speaker 2: I mean, uh I'm kind of detracting but
Speaker 2: uh I'll come back to the, you know, do the,
Speaker 2: do export controls work. Um But yeah, so in the
Speaker 2: case of Huawei, what they did with the, with, with that,
Speaker 2: with that process is it's a, it's a, it's a
Speaker 2: much more labor intensive process. You know, when you're in
Speaker 2: the lithography process, you have to pass over again and
Speaker 2: again and again,
Speaker 1: yield, you get a lot of commercial,
Speaker 2: it costs a lot more money. So unless somebody's basically,
Speaker 2: you know, reimbursing you for all that, that leakage, that
Speaker 2: cost leakage, it's not competitive, basically. OK. So, so coming back,
Speaker 2: so we got binge buying
Speaker 2: uh which is happening. Um the other is, of course,
Speaker 2: is just black market and gray market, you know, achieving
Speaker 2: chips uh you know, on the black market and the
Speaker 2: other uh and this is why this is a game
Speaker 2: of whack a mole, right? When we talk about um
Speaker 2: the US administration trying to, trying to enforce um
Speaker 2: uh but you know, the the other is when, when
Speaker 2: we're talking about uh cloud computing, for example, and and
Speaker 2: accessing the power of those chips to to do whatever
Speaker 2: computer processing you want, you can access that in the
Speaker 2: cloud from a third
Speaker 2: party.
Speaker 1: So the data center can be in the Middle East,
Speaker 1: the company could be in China, right? I mean, right,
Speaker 1: they're accessing all the cutting edge chips being used over there.
Speaker 2: So, so this is, this is a a game that's
Speaker 2: in progress.
Speaker 2: And uh you know, we're going to continue to see,
Speaker 2: you know, efforts to sort of uh clamp down on
Speaker 2: these types of, of things. And I think maybe maybe
Speaker 2: another time we can come back and talk about what
Speaker 2: I call the surveillance supply chain. Basically, the the way
Speaker 2: new technologies are going to be used to essentially achieve much,
Speaker 2: much greater transparency and traceability in supply chains, right, to
Speaker 2: trace the actual movement.
Speaker 2: Uh And a lot of this is gonna be focused
Speaker 2: on A I right on, on A I chips and
Speaker 2: it's gonna be focused on cloud infrastructure. You mentioned uh
Speaker 2: data centers. This is where all this is going to
Speaker 2: be playing out. So it's
Speaker 1: not just a question of I buy something from you
Speaker 1: and then I do whatever I want with it.
Speaker 1: In fact, even after buying it from you, I remain
Speaker 1: liable to how I use it
Speaker 2: or, or even the the original seller will be able
Speaker 2: to trace where it actually is including embedded in a
Speaker 2: finished product basically. So I think we'll see more of
Speaker 2: that and that is that's going to be a growth industry,
Speaker 2: think about the amount of money that's gonna be made
Speaker 2: just around the compliance like the reg tech that's gonna
Speaker 2: go into that and that's gonna be big
Speaker 1: rec tech huh so many different techs out there. Um
Speaker 1: You know, we began this discussion in a very general term.
Speaker 1: We said techno nationalism define it. I don't think you
Speaker 1: even mentioned the US initially. When you responded to my question,
Speaker 1: you definitely did not touch on China, but we have
Speaker 1: naturally veered toward the US China dynamic because let's be
Speaker 1: clear that is the big story behind techno nationalism. Um
Speaker 1: I want you to talk to me about something that
Speaker 1: you devote quite a bit of space in your book,
Speaker 1: which is the Digital Belt and Road by China.
Speaker 2: Yeah, so, so you know, yes, absolutely. This is all
Speaker 2: about great power competition us China. Um you know, the
Speaker 2: Belt in the Road, the original Belt and Road, of course,
Speaker 2: is a, you know, it's a ma major Chinese initiative
Speaker 2: to essentially connect China to the rest of the world
Speaker 2: through massive infrastructure projects, ports, rail, et cetera, roads, roads
Speaker 2: and and so on.
Speaker 2: Uh And that of course, is beneficial because a it
Speaker 2: connects the Chinese economy to the rest of the world.
Speaker 2: It allows for frankly a lot of excess capacity from
Speaker 2: steel companies and all kinds of other things in China
Speaker 2: to actually go out and build these big projects and
Speaker 2: so forth. But those who have gotten very expensive and,
Speaker 2: and as you know, uh as a banker and you're
Speaker 2: following these things, there are a lot of um countries
Speaker 2: that are on the verge of defaulting,
Speaker 2: uh they can't pay back the money that the Chinese
Speaker 2: lent them and so forth. And then we've had this, this, this, this,
Speaker 2: this notion of, you know, debt diplomacy and that sort
Speaker 2: of thing. So in a geopolitical and techno nationalist context,
Speaker 2: um so China has, has uh really turned its focus
Speaker 2: along the Belt and Road to building digital infrastructure. It's
Speaker 2: not as expensive, but at the same time, you, you
Speaker 2: get more bang for your Renminbi, right? And, and, and
Speaker 2: that is because if you have
Speaker 2: uh Chinese companies like Huawei and, and you have, you know,
Speaker 2: Alibaba cloud and, and, and you know, Tencent and all
Speaker 2: these other companies building the digital infrastructure, you have sense time,
Speaker 2: the the big A I uh software makers hike vision,
Speaker 2: the the uh the the uh the camera surveillance technology,
Speaker 2: facial recognition, you have um Baidu, the the the Chinese
Speaker 2: uh satellite network. So you have this ecosystem of Chinese
Speaker 2: companies
Speaker 2: that are building this digital infrastructure and then you overlay
Speaker 2: on top of that uh Beijing's um you know, Beijing's
Speaker 2: efforts to, to roll out its digital currency for and,
Speaker 2: and of course, this is all part of the de
Speaker 2: dollarization efforts. Uh you know that they've been involved with,
Speaker 2: with other BRICS countries and also with, you know, their
Speaker 2: client states along the Belt and the Road, this becomes a,
Speaker 2: a very, very
Speaker 2: um compelling and very attractive uh formula if you will
Speaker 2: for extending influence economic influence and, and you know, ee
Speaker 2: extending as, as sort of the duality of that is it,
Speaker 2: you know, it doubles as a, as a, as a
Speaker 2: force multiplier and projector.
Speaker 1: I just
Speaker 1: want to ss before I want to talk about the
Speaker 1: digital currency part in a moment, but I just want
Speaker 1: to stay with the digital infrastructure part a little longer.
Speaker 1: Um When we talk about this
Speaker 1: digital stack, if you will coming from the various Chinese
Speaker 1: ah providers of technology, is it ubiquitous? Is it interoperable? So,
Speaker 1: could I have Cisco routers in my country? And routers
Speaker 1: made by I don't know Huawei or something and they
Speaker 1: can all talk to each other or Cisco routers will
Speaker 1: have a problem dealing with
Speaker 1: interoperability with Chinese technology.
Speaker 2: Well, that's a, that's a great question. So, so the
Speaker 2: currently the way things stand, you know, you have very
Speaker 2: few players building this kind of technology. Um There, there
Speaker 2: have been many efforts through the, the O A uh
Speaker 2: network which is essentially efforts to basically open source. A
Speaker 2: lot of the technologies that go into the whole value
Speaker 2: chain around five G wireless. And the the rationale behind
Speaker 2: that is
Speaker 2: you don't just have Ericsson and Nokia and Qualcomm and, and, and,
Speaker 2: and Huawei basically, uh so
Speaker 2: as it stands now, if you have one big provider,
Speaker 2: it's a lot more complicated, right? It's, and, and it's
Speaker 2: very difficult to get these companies to work together. Basically,
Speaker 2: it's almost impossible, basically. Right? Um So um
Speaker 2: the i the answer is it works better. And certainly
Speaker 2: if we're talking about the Digital Belt and Road, and
Speaker 2: we're talking about, you know, um China's China's view and
Speaker 2: China's strategy, it's, it's about having a, a fully Chinese ecosystem.
Speaker 1: I heard this uh onion analogy from an executive recently
Speaker 1: where they said that if you have core infrastructure that
Speaker 1: is very security sensitive of an organization, you tend to
Speaker 1: still stay very Western with respect to buying those technologies
Speaker 1: and capabilities. But if there are outer layers of that
Speaker 1: company's infrastructure, you're OK, buying something rather ubiquitous, which doesn't
Speaker 1: have that much of a tech related sensitivity.
Speaker 1: But it does come with very large scale from the
Speaker 1: Chinese and it's very reasonably priced and it does make
Speaker 1: commercial sense to have the outer layers, having some degree
Speaker 1: of Chinese layering, but not the inner
Speaker 1: layers.
Speaker 2: And, and that's an ongoing debate and it's a very
Speaker 2: contentious debate that is taking place in European countries in particular, right?
Speaker 2: Where um you know, the the consensus is moving though
Speaker 2: uh to the point to where nobody wants potentially adversarial
Speaker 2: uh technology in the core of their networks anywhere uh to,
Speaker 2: you know, uh on if you peel, you know, if
Speaker 2: you have, if you leave the outer layers of the
Speaker 2: onion out there, um there's there's now increasing debate as
Speaker 2: to who should be, who should be providing that kind
Speaker 2: of technology. So
Speaker 2: um that
Speaker 1: is out
Speaker 2: and, and, but that's where the tech diplomacy takes place, right?
Speaker 2: That's where governments, you know, they have, they, they deal
Speaker 2: with pressure from in Washington, in particular, if we're talking
Speaker 2: about Huawei.
Speaker 1: Ok. So now let's come to the digital currency aspect.
Speaker 1: So you see there being two sides of the same coin,
Speaker 1: the digital infrastructure diplomacy and then using the digital currency
Speaker 1: as
Speaker 1: a compliment uh additional offering if you will from the Chinese.
Speaker 2: Well, the the the the issue with, with digital money
Speaker 2: uh or in particularly uh central bank backed digital currencies, right? As, as,
Speaker 2: as they become, as they sort of are rolled out
Speaker 2: if you will. Um is you're, you're dealing with um
Speaker 2: a central bank of a of a sovereign state, basically
Speaker 2: that is overseeing uh this particular currency. So
Speaker 2: uh the question then becomes, is this a democratic state
Speaker 2: that uh adheres to specific kinds of values, privacy values?
Speaker 2: How do you know how to use, how you know what,
Speaker 2: what can be done once somebody's data is harvested to
Speaker 2: what may it be linked and applied? Can it be
Speaker 2: applied to some kind of a social credit system essentially? Right?
Speaker 2: Because our our commercial daily activities
Speaker 2: uh that's our lifeblood, right? And if, if, if you
Speaker 2: know if, if we can't buy a cup of coffee
Speaker 2: or if we can't buy a train ticket because we've
Speaker 2: got a low social credit score, right? You know, that
Speaker 2: is that's, that, that's a problem. Right. And certainly from a,
Speaker 2: from a liberal democratic value standpoint, that's a problem. Right. So,
Speaker 2: so I think we're, when, when we look at different
Speaker 2: systems where we have a potential um
Speaker 2: Chinese hegemony, uh digital money hegemony, particularly around uh around
Speaker 2: the Belt and Road, some of the countries in the
Speaker 2: Belt and Road. Um that's a, that's a, that's a train,
Speaker 2: that's a head, head on train crash, right? Uh With, with,
Speaker 2: with Western values when it comes to what kind of
Speaker 2: money is used and how it's used and how that
Speaker 2: data is used, right?
Speaker 1: But there's so many countries in the world which run
Speaker 1: large trade deficits vis A vis China
Speaker 1: and
Speaker 1: add to that the dynamic of weaponization of the US
Speaker 1: dollar seizing the central bank assets of Afghanistan of Russia.
Speaker 1: I would think that there would be actually increased motivation
Speaker 1: for countries that have pretty deep trade relationship with China
Speaker 1: and are a bit spooked by what the US has
Speaker 1: done in recent years to reduce their reliance on the
Speaker 1: US
Speaker 1: dollar.
Speaker 2: I totally agree. I, I think we're going to see,
Speaker 2: I mean, we're seeing efforts and we're seeing a lot
Speaker 2: of enthusiasm around de dollarization, right? And uh so I,
Speaker 2: I think I, I, well, the green back is going
Speaker 2: to be,
Speaker 2: ah, a very powerful reserve currency for decades to come,
Speaker 2: but there clearly is an impetus right? There clearly is,
Speaker 2: is a very conscious effort to move away. And in
Speaker 2: the process of doing that,
Speaker 2: uh the rise of digital currencies bring, you know, bring
Speaker 2: with them all kinds of issues,
Speaker 1: right?
Speaker 2: So
Speaker 1: the
Speaker 1: funny thing, Alex is that while we're discussing this in
Speaker 1: the context of frontier technology,
Speaker 1: the biggest beneficiary of this motivation to de dollarization is
Speaker 1: actually an old asset, which is gold. That's the thing
Speaker 1: that has rallied in the last couple of years, unlike
Speaker 1: any other things. Whereas you know, cryptos they go up
Speaker 1: and down CBD CS, the things that we you and
Speaker 1: I are talking about is still a work in progress.
Speaker 1: We're not sure whether the Chinese or any other country
Speaker 1: would really be enthusiastically replacing their paper currency with digital currency,
Speaker 1: but the potential is certainly there.
Speaker 1: Um OK, so that takes me to the transatlantic alliance,
Speaker 1: you mentioned earlier that Europe and both at the government
Speaker 1: and corporate level, there is some degree of, you know,
Speaker 1: rethinking about how to engage with China on the US.
Speaker 1: We've seen it already pretty clear there is no daylight
Speaker 1: between the Democrats and Republicans. Everybody is becoming pretty antagonistic
Speaker 1: to Chinese technology. So how are the Europeans thinking? How
Speaker 1: are the Americans thinking in terms of their collaboration?
Speaker 2: Yeah, so there there are different views on this, right?
Speaker 2: So the the the diehard neo li uh you know,
Speaker 2: basically look at all of these, these big initiatives like
Speaker 2: the Chips and Science Act, you know, the chips for
Speaker 2: America Act, which are big subsidies for um the semiconductor
Speaker 2: sector to reso or bring back fabrication to the United
Speaker 2: States government subsidized. Uh They look at things like that,
Speaker 2: they look at things like the um
Speaker 2: the uh the Ira Act, right? Which is, which is the,
Speaker 2: the Inflation Reduction Act, which has a lot of buyer
Speaker 2: and it has a lot of subsidies and sweeteners for
Speaker 2: companies to, to, to move things home and, and, and, and, and, and,
Speaker 2: and do production that otherwise they may have offshored somewhere else.
Speaker 2: So the neo, the, the neo liberal argument says, look,
Speaker 2: this is a race to the bottom, right? Because it's
Speaker 2: not just the US that is offering these kinds of subsidies.
Speaker 2: But now, of course, then the Europeans have to respond
Speaker 2: and like, and the South Koreans have to do the
Speaker 2: same thing. And all of the, you know, all of
Speaker 2: these regions are in fact putting up big, big amounts
Speaker 2: of money, particularly for semiconductors. But I would say that
Speaker 2: that it's not a race to the bottom and that,
Speaker 2: and we have not seen that. Yes, there have been
Speaker 2: European companies that have gone to the US,
Speaker 2: but there are us companies that are still looking to
Speaker 2: invest in Europe, right? We look at Intel, for example,
Speaker 2: you know, Intel is a little bit stalled in some
Speaker 2: of their efforts, but nonetheless, uh they'll get on track, right. They,
Speaker 2: you know, to do a lot of a lot more
Speaker 2: research and development and actually fabrication in in Europe. And they,
Speaker 2: and they will avail themselves of European money basically. So,
Speaker 2: so I think
Speaker 2: that will happen. Um now
Speaker 2: there, there, there's no doubt that that as we see
Speaker 2: this reconfiguration, this restructuring around strategic supply chains, that more
Speaker 2: and more innovation and more and more investment is concentrating
Speaker 2: in these different nodes that otherwise may have been spread
Speaker 2: out a little bit more, you know, in a much
Speaker 2: more open trading, less geo economic paradigm.
Speaker 2: Um So in that respect,
Speaker 2: um certainly developing countries that may have had, you know,
Speaker 2: may have been playing a bigger role in global value chains,
Speaker 2: they're losing out that, that, that clearly is happening. Um
Speaker 2: So the, so the renaissance, if you will uh the
Speaker 2: the technology and the innovation renaissance, which is happening because
Speaker 2: of the public, private partnerships that are being so well
Speaker 2: funded in these nodes, right? That's happening.
Speaker 2: And yes, there is going to be there is going
Speaker 2: to be economic opportunity in those places, but it's going
Speaker 2: to be a lot more uneven,
Speaker 1: right? But is there alignment full alignment between the Americans
Speaker 1: and the Europeans on how to deal with China? No,
Speaker 2: no.
Speaker 1: Has the alignment improved in the last 3.5 years under Biden?
Speaker 1: I I
Speaker 2: think uh I think you have to go country by
Speaker 2: country in Europe, right? The Germans are really struggling, right?
Speaker 2: They're really divided because they've had just a core, small
Speaker 2: group of companies that have invested very, very heavily right in, in,
Speaker 2: in China. Right. Siemens and the auto, the big automotive companies,
Speaker 1: their, their global sales come from China. Yeah, that's right.
Speaker 1: BMW s of
Speaker 2: the world. Exactly. Exactly. They bet big right. Under Chancellor Merkel. Um,
Speaker 2: they really bet big on China and, and, but then
Speaker 2: if you look at sort of the middle tier companies
Speaker 2: in Germany and you look at, you know, uh the labor,
Speaker 2: you know, the the labor pool there, um they want,
Speaker 2: they want jobs to come back to Germany, they want
Speaker 2: more investment to, you know, to, to sort of gravitate
Speaker 2: in the tech sector uh to, to Germany. So that
Speaker 2: Germany is one example. Um So again, I think I
Speaker 2: mentioned early on there is no way to analyze this
Speaker 2: whole situation through a zero sum uh you know, kind
Speaker 2: of lens, right? It's, there's just, there's so many different
Speaker 2: overlapping interests, some peop some lose some win.
Speaker 2: Uh There's a great deal of, of uncertainty, but I
Speaker 2: think in general, I think in general the transatlantic um relationship,
Speaker 2: of course, we have some elections coming up here, right?
Speaker 2: Just a few. Just yes. So we have a big
Speaker 2: presidential election coming up. Uh You know, III I would
Speaker 2: say this uh I think uh uh a Trump two
Speaker 2: term I think would, would put much more strain on
Speaker 2: the transatlantic relationship. Of course, because of his tariff plans
Speaker 2: and so forth
Speaker 2: than a Harris uh administration. But having said that there
Speaker 2: still are too many uh uh mutual interests across the Atlantic.
Speaker 2: Uh you know, uh interests around A I standards, basically
Speaker 2: rule frameworks around tech interests to, to cooper on supply
Speaker 2: chain resilience around critical minerals, rare earths uh
Speaker 2: uh incentives. I think uh I mentioned this a around semiconductors.
Speaker 2: Uh I think there are incentives uh around, you know,
Speaker 2: things like lithium batteries and, and electric vehicles and so forth.
Speaker 2: So I think there are, there still are quite a
Speaker 2: few incentives and then of course, there's the NATO angle
Speaker 2: and the security angle when it comes to Ukraine.
Speaker 2: Um So II, I think, I think the transatlantic relationship will,
Speaker 2: will be just fine.
Speaker 1: I want to stay on that for a second because
Speaker 1: you made a, you know, great premise, which is that
Speaker 1: we should look at country by country. The European Union
Speaker 1: is not a single entity. There are countries, especially on
Speaker 1: the eastern side of the European Union, which are very
Speaker 1: friendly to China and then there are others who are not.
Speaker 1: Um So is there a risk that eu itself could
Speaker 1: fracture as a result of the US China conflict?
Speaker 2: Um There's always a risk that, you know, when you
Speaker 2: have a uh a union or certainly a customs union
Speaker 2: that big uh when, when you have a block of
Speaker 2: countries that big. Yes. Uh There's always a risk of that. And,
Speaker 2: and I totally agree. I mean, I think, you know,
Speaker 2: if you look at the eastern eastern European countries, they're
Speaker 2: very eager to absorb investments, you know, from China, they're
Speaker 2: very eager for infrastructure. Um uh But at the end
Speaker 2: of the day,
Speaker 2: I think there is a tipping point uh even in
Speaker 2: eastern Europe, when uh the view becomes that, that any
Speaker 2: outside power, China or anybody else, in this case, of course,
Speaker 2: it's China is overstepping its bounds when it comes to
Speaker 2: trying to exert influence. And we've seen that we've seen
Speaker 2: that over the last decade, particularly during the COVID crisis, right.
Speaker 2: So uh even that uh I think we, you know,
Speaker 2: we will, we will, we will continue to see,
Speaker 2: you know, if I had to make a prediction of,
Speaker 2: you know, what the global economy is going to look
Speaker 2: like from a supply chain standpoint over the next decade,
Speaker 2: I would say that
Speaker 2: what is deemed desking today uh with from strategic Chinese
Speaker 2: or single source kind of Chinese supply chains that DERIS
Speaker 2: is going to slowly evolve into decoupling
Speaker 2: essentially. And we'll just see those supply chains basically coalesce,
Speaker 2: you know, under different in different regions.
Speaker 1: I'm curious to see what happens to the EV supply chain.
Speaker 1: If Chinese companies invest in Hungary and Poland and Turkey
Speaker 1: and starts making B DS and other cars, they should
Speaker 1: be credible within Europe under eu rules of origin
Speaker 1: and they should be classified as made in Europe cars.
Speaker 1: But clearly in the context of U MC, the Americans
Speaker 1: have said they are not going to accept that, that
Speaker 1: even if we already make something in Mexico, it will
Speaker 1: be considered a made in China car. So I can
Speaker 1: sort of think about this alignment that if you are
Speaker 1: more open to investment in the EU than the US
Speaker 1: is within the U MC A.
Speaker 1: Uh how do these things?
Speaker 2: Yeah, I mean, look there uh this is just playing out. Now, now,
Speaker 2: one thing I would say about um sort of the, the,
Speaker 2: the the the movement of, of, in this case, Chinese
Speaker 2: electric vehicle assembly, uh manufacturing, you know, out of China into,
Speaker 2: into the European Union.
Speaker 2: Um what is still going to be a very contentious issue,
Speaker 2: there is going to be the fact that they may
Speaker 2: be assembling the cars there. But if all the parts
Speaker 2: and components are also still coming from China, then I
Speaker 2: think we're going to run into issues around local content
Speaker 2: requirements and we're already hearing about that, right? So, you know,
Speaker 2: if you look at uh if you look at a
Speaker 2: typical uh free trade agreement that in that involves automotive,
Speaker 2: um they're usually pretty high
Speaker 2: local content requirements or even local labor, uh you know,
Speaker 2: the US MC A which is the, you know, us,
Speaker 2: Canada Mexico replacement of what was used with NAFTA. Um
Speaker 2: I mean, they've, they've, they've got in very, very high,
Speaker 2: um you know, local origin content, uh requirements that even include,
Speaker 2: you know, you know, proving that uh that, that labor
Speaker 2: was paid a certain wage. Right. So I, I think
Speaker 2: you, you might call it a non tariff barrier if
Speaker 2: you want. You know, technically, but II, I think
Speaker 2: no matter what happens in eastern Europe, as long as
Speaker 2: it's part of the, the union, um there's going to
Speaker 2: be pretty strong push back uh about about moving uh
Speaker 2: you know Chinese uh
Speaker 2: Chinese cars into that into that
Speaker 2: region,
Speaker 1: right? So there is like general assembly, there is full
Speaker 1: kit assembly and there is manufacturing. I'm learning about this
Speaker 1: because I'm thinking about phone Apple phones being made in
Speaker 1: India or assembled in India debate. Uh And and I'm
Speaker 1: sure for the EV same thing comes up. Uh Alex,
Speaker 1: I want to talk about substation in India momentarily, but
Speaker 1: just a couple of words on this race for innovation.
Speaker 1: So chips, for example, the US remains the undisputed leader
Speaker 1: in the world in chip design, East Asia is the
Speaker 1: undisputed leader in the world in chip manufacturing. But the
Speaker 1: design which is the highest value added comes from the US.
Speaker 1: The best innovation on the chip side come from the
Speaker 1: US
Speaker 1: Europe has pockets of excellence. You talked about a SML earlier.
Speaker 1: A SML itself is a function of a bunch of
Speaker 1: other excellent companies, you know, Carl Zeiss Lens and Siemens Laser.
Speaker 1: All going into the capabilities that A SML develops. Um
Speaker 1: We don't hear as much about cutting edge innovation coming
Speaker 1: out of China in green transition. Some uh and to
Speaker 1: your point earlier that
Speaker 1: buying up lots of dvs and then making up to
Speaker 1: seven nanometers perhaps in five can be done by the
Speaker 1: Chinese at a low year nonetheless. But has this, this
Speaker 1: entire trade tech war led to widening of the tech
Speaker 1: gap between the US and Chinese already?
Speaker 2: Uh Well, let's let's stick with the semiconductor uh discussion, right?
Speaker 2: I think it's good. So I, I think when you
Speaker 2: talk about semiconductors, you really have to be careful to
Speaker 2: make that distinction between advanced semiconductors and sort of
Speaker 2: for lack of a better term, we'll call it legacy.
Speaker 1: So leading versus lagging
Speaker 2: edge versus lagging edge and some people don't like the
Speaker 2: term lagging edge, especially, you know, big, even big Western
Speaker 2: companies that are making so called lagging edge. So, but
Speaker 2: um so I think that's a really important distinction. Um
Speaker 2: So if, if we're talking about um China or anyone
Speaker 2: else being anywhere near what a SML can do when
Speaker 2: it comes to extreme ultraviolet,
Speaker 2: a decade, two decades, maybe never, right? Because you know,
Speaker 2: this is not a, this is not a stationary target,
Speaker 2: this is, you know, Moore's law is still alive, right?
Speaker 2: Uh uh And, and so it's just so incredibly complex
Speaker 2: and hard and you need to have the right partners.
Speaker 2: It's that ecosystem, right? And if you can't get that
Speaker 2: full ecosystem,
Speaker 2: it's almost an impossibility. But if we're talking about trailing edge,
Speaker 2: um then, then I think China uh is uh uh
Speaker 2: already a player and is going to be a much,
Speaker 2: much bigger player in terms of global supply. Uh And
Speaker 2: if you think about it,
Speaker 2: um the innovation that you talked about, there is a
Speaker 2: lot of innovation taking place in China. There's no question
Speaker 2: about it. So
Speaker 1: you don't have
Speaker 1: to have leading edge processors to do innovation.
Speaker 2: Not
Speaker 2: at all, not at all. I mean, you need it
Speaker 2: for leading edge A I, right? So if you want
Speaker 2: to do machine learning and like large language models and
Speaker 2: that sort of thing, you need to have cutting edge
Speaker 2: A I, right? And you need cutting edge A I but,
Speaker 2: but for even relatively sophisticated weapons systems,
Speaker 2: uh for almost all consumer electronics, you don't need leading edge, right?
Speaker 2: I mean, and so Apple, you know, the, the, you know,
Speaker 2: a as it pushes the, the, the, the the boundaries
Speaker 2: with its iphone, uh a Tesla, for example, you know, you,
Speaker 2: I guess you can put in more and more advanced
Speaker 2: technology because it's a computer on wheels, right? Depending on
Speaker 2: what you want it to do other than just drive around.
Speaker 2: But um but, but you know, if you look at,
Speaker 2: if you look at medicine, uh you know, he medicine
Speaker 2: and health care, if you look at basic communications. If
Speaker 2: you look at most consumer electronics, most of that, there's
Speaker 2: a huge market for lagging edge tips.
Speaker 1: And I think the lighting it chips are also a
Speaker 1: pretty important component of the entire green transition wave that
Speaker 1: we're seeing. So building smart wind turbines, building new age
Speaker 1: solar cells. Again, you don't need three nanometer chips for them,
Speaker 1: but you can have tremendous value addition and sources of
Speaker 1: jobs and profitability and market share just through pushing that
Speaker 1: that line of technology. Um
Speaker 1: in terms of Southeast Asia, you know, that our mutual
Speaker 1: friend Charlie Ormiston and I, we worked on a project
Speaker 1: together with a bunch of analysts from D BS and
Speaker 1: Bain and company. Uh and we wrote a report on
Speaker 1: Southeast Asia's outlook.
Speaker 1: So I want to hear your view on subs Asia
Speaker 1: as you know, we feel that the techno nationalism will
Speaker 1: have some winners and losers to your point earlier. And
Speaker 1: we can we see this region being a winner? Do
Speaker 1: you see that as an unqualified argument or do you
Speaker 1: think that there are some ifs and buts around
Speaker 1: that?
Speaker 2: II, I would agree and I thought it was a
Speaker 2: good report, of course. And I went to the presentation,
Speaker 2: I did listen to your presentation.
Speaker 2: Yes, I, I would absolutely agree with it because of course,
Speaker 2: Southeast Asia is a very uneven economic landscape right there.
Speaker 2: You know, you've got the, the original four right countries, Singapore,
Speaker 2: of course, you know, being right at the top. Um
Speaker 2: so it will be uneven. So if you look at
Speaker 2: uh in the electronic sector, for example, um you know,
Speaker 2: where they're uh interestingly enough as these uh these as
Speaker 2: supply chains um
Speaker 2: move or, you know, derisk or decouple out of China,
Speaker 2: you know, they're going to, of course, Vietnam, right, they're
Speaker 2: going to Malaysia, some of it's coming to Singapore uh
Speaker 2: and so
Speaker 2: on,
Speaker 1: surprising amount coming to Singapore. So
Speaker 2: not so surprising. Uh, you know, III I think Singapore certainly,
Speaker 2: um
Speaker 2: you know, provides a good environment uh for some of
Speaker 2: the high end, you know, certainly memory chips and sort
Speaker 2: of expanding the, the, the chip, the chip sector. Although
Speaker 2: that's a very, uh that's a, that's a very discreet
Speaker 2: topic here, right? Uh Nobody wants to really admit that that,
Speaker 2: you know, a lot of that is coming to Singapore
Speaker 2: because nobody wants to really offend
Speaker 2: the Chinese in particular, but the
Speaker 1: country remains one of the major players in lagging edge,
Speaker 1: manufacturing and exports.
Speaker 2: That's,
Speaker 2: that's exactly right. So I think there's gonna be more
Speaker 2: activity there, certainly around A I, that's a big part
Speaker 2: of Singapore's uh future, right? They're, they're, they're, they're hedging
Speaker 2: or they're, they're betting I should say big on, on
Speaker 2: being a player in that regard. Um Yeah, so I,
Speaker 2: I think I, I think
Speaker 2: the necessity to, um to derisk Taiwan from a chip
Speaker 2: perspective where you have literally one company, one company making 90%
Speaker 2: of the world's most advanced chips as a subcontractor and 60%
Speaker 2: of all of the world's chips. I mean, that's just not,
Speaker 2: that's just simply not sustainable, right? That just can't be.
Speaker 1: So we can talk about Apple, we can talk about.
Speaker 1: But Maiden Taiwan made by TS MC, made by
Speaker 2: TS MC, I mean, that's, you know, so, so the
Speaker 2: tech diplomacy that I mentioned earlier is about, you know,
Speaker 2: getting them to build plants, not just in Arizona, but
Speaker 2: in Germany and other parts of the world. And I
Speaker 2: think
Speaker 2: um the uh from the the lagging edge side, uh
Speaker 2: we'll see more and more of that again, being restored
Speaker 2: uh again within II I hate this term friend shoring, right?
Speaker 2: But e essentially what it means is a much more
Speaker 2: reliable uh partnership, right? Um So, uh but so, so
Speaker 2: Southeast Asia, I think it's, it's gonna be very uneven
Speaker 2: from a, from a, from a tech standpoint. Um And
Speaker 2: then
Speaker 2: I know you want to talk about this. Um You know,
Speaker 2: is there a linkage to India? Right? Is there, is
Speaker 2: there a corridor that links Southeast Asia more to India, right?
Speaker 2: When it comes to again, trailing edge chips and there,
Speaker 2: I think uh Malaysia is a very interesting country and
Speaker 2: I think if there is um if, if India is
Speaker 2: gonna have competition, if India is able to pursue its
Speaker 2: hopes and dreams of establishing a, a trailing edge,
Speaker 2: uh sort of manufacturing base and they, there's activity going
Speaker 2: on in that area. I think Malaysia is going to
Speaker 2: give them a run for their money. Alex.
Speaker 1: I'm really surprised by the developments out of Malaysia. I
Speaker 1: think when we started writing our Southeast Asia report at
Speaker 1: the beginning of this year,
Speaker 1: I wasn't that seriously taking Malaysia's prospects. I have changed
Speaker 1: my mind dramatically over the last 89 months. And in
Speaker 1: my recent trip to Kuala Lumpur also reinforced that view
Speaker 1: that you actually have now interregional competition within Malaysia from
Speaker 1: Penang to Cyberjaya to Johor. They are all
Speaker 1: competing for the tech dollars and you have now the
Speaker 1: Western companies, the Chinese companies and the Indians, everybody is
Speaker 1: sort of flocking to Malaysia for the know how for
Speaker 1: their abandoned land and water and electricity. It seemed like
Speaker 1: a very fertile ground for data centers and fabs. And
Speaker 1: I thought that this was going to be for the
Speaker 1: Vietnam and Indonesia to pick. But I think Malaysia is
Speaker 1: going to be a very formidable player in this area.
Speaker 2: Absolutely.
Speaker 2: Now, we do have another development uh happening across Southeast Asia,
Speaker 2: which is, which is a sort of a, an extension
Speaker 2: of the original uh you know, export control uh environment.
Speaker 2: Uh and that is that as many Chinese companies pick
Speaker 2: up and move right to, to circumvent export controls, et
Speaker 2: cetera or to, you know, to, to, to get out
Speaker 2: from under that, that that umbrella if you will
Speaker 2: um you know that that's been placed over them by
Speaker 2: uh by the Department of Commerce and the US Bureau
Speaker 2: of Industry and Security which enforces export controls.
Speaker 2: A lot of the, a lot of that um supply
Speaker 2: chain activity that was in China is just picking up
Speaker 2: and moving
Speaker 2: to Southeast Asia. So the question then becomes um do
Speaker 2: the export controls and the licensing requirements simply follow them, right? Does,
Speaker 2: does Washington turn around and say, oh, ok. So you've relocated,
Speaker 2: you know, uh a factory from, from China to Vietnam.
Speaker 2: Uh It's, it's basically a transshipment exercise, right? Or it's, it's,
Speaker 2: it's like we were discussing with Eastern Europe. Um Now
Speaker 2: we're going to start, you know, imposing once again,
Speaker 2: you know, security requirements coming out of Vietnam or coming
Speaker 2: out of Malaysia or even Singapore.
Speaker 1: I understand this is already happening. It's already happening even
Speaker 1: during the Trump years. And certainly during the Biden years,
Speaker 1: we've had Department of Commerce officials go repeatedly to Vietnam
Speaker 1: precisely to investigate issues like that.
Speaker 1: But you know, it's challenging. Um I don't think anybody
Speaker 1: moves one for one, a company from country to Country B.
Speaker 1: There is always some implement creation, some value creation in
Speaker 1: country B. So then it becomes a question of gradation,
Speaker 1: the gray area that you are talking about, right? What
Speaker 1: percent of value added from China is acceptable? Is it zero?
Speaker 1: Is it 10? Is it 20? And then how much,
Speaker 1: you know, forensic investigation do you have to do with
Speaker 1: the paperwork and the actual hardware to ascertain those claims?
Speaker 2: Absolutely.
Speaker 2: So, the, so, you know, this is an absolute bonanza, right?
Speaker 2: For the consulting firms, lawyers. Uh, you know,
Speaker 1: as you said,
Speaker 2: tech, I mean, this is a great time to be, uh,
Speaker 2: you know, a big four or mckenzie or, you know, um,
Speaker 1: stuff that you did in your previous life,
Speaker 2: stuff
Speaker 2: that I did in my previous, I'm wondering if I
Speaker 2: should go back. Uh But yeah, definitely.
Speaker 1: Um finally, uh we just touched on India, let's talk
Speaker 1: a little more about India because India has also been
Speaker 1: pursuing what is known as making in India
Speaker 1: for the last decade or so. And India has ruled
Speaker 1: out what is known as production link and send a
Speaker 1: PL scheme and not small a chain. I mean, we're
Speaker 1: talking about 20 something odd billion dollars worth of pl
Speaker 1: have been offered. It hasn't been taken up 100% but some,
Speaker 1: some has been and there are large Indian conglomerates who
Speaker 1: are now joining the fray in raising capital to build
Speaker 1: fabs in India.
Speaker 1: Is it a worthy goal to create a big manufacturing
Speaker 1: footprint when you have a hyper competitor like China, when
Speaker 1: you have Southeast Asia, just around the corner, should all
Speaker 1: countries that are large enough, try to build their own
Speaker 1: supply chain for certain levels of technology?
Speaker 2: Yeah, so I think so, India is such a unique case.
Speaker 2: I mean, India has not had great success with industrial
Speaker 2: policy in the past.
Speaker 2: It's always the same, same reasons. Right. It's, it's, it's, it's, uh,
Speaker 2: you know, too many taxes, it's over regulation, it's bad infrastructure,
Speaker 2: it's corruption, it's, you know, a lot of things that
Speaker 2: are big, you know, that are big challenges. So the
Speaker 2: question is now, you know, can India move from what
Speaker 2: it's doing now? Well, which is basically R and D
Speaker 2: and engineering centers that, you know, you know, companies have
Speaker 2: set up,
Speaker 2: uh it does software very well. It's got a lot
Speaker 2: of engineers, that sort of thing.
Speaker 2: Can they move it to a man? Can they move
Speaker 2: that to more of a manufacturing focused endeavor? Right. And
Speaker 2: that's hard, that's, that's, that's been very, very hard
Speaker 1: for that also somewhat unique because you go from agriculture,
Speaker 1: you leapfrog into services and now you're gonna go back
Speaker 1: to the mid point to the mid
Speaker 1: point.
Speaker 2: And, and I mean, you know, if, if you look
Speaker 2: at the numbers, some numbers show that actually manufacturing is
Speaker 2: actually shrunk in India, uh you know, even during this
Speaker 2: period where it's been emphasized, right? So
Speaker 2: I don't think it's gonna happen unless you have, you know, a,
Speaker 2: a situation like Apple and Foxconn basically moving and just
Speaker 2: putting billions of dollars into an ecosystem and bringing 2nd
Speaker 2: and 3rd tier suppliers. And even then you have, you
Speaker 2: have these um these isolated hubs across India. You know,
Speaker 2: you know, that, that, that are potentially these hotbeds.
Speaker 2: The other thing is, and, and I write about this in,
Speaker 2: in my book is, you know, what India really wants
Speaker 2: to do is it wants to, it wants to grow
Speaker 2: an indigenous um sort of cell phone, uh you know,
Speaker 2: mobile phone, uh sort of kind of ecosystem that then
Speaker 2: uh grows out into uh infrastructure for wireless and that
Speaker 2: type of thing. Um
Speaker 2: And that to do that you need you, you, you
Speaker 2: need uh certain kinds of technology, right? So, you know,
Speaker 2: obviously you need chips, right? So if you can, if
Speaker 2: you can bring foreign investment in and you can get
Speaker 2: the right companies to come in and, and build those
Speaker 2: lagging edge chips and, and, and so on. Um Then
Speaker 2: that I, I think that's, that's gonna be critical and
Speaker 2: I think it's gonna be a big challenge. And as
Speaker 2: I mentioned, I think Malaysia will probably uh probably do that.
Speaker 2: They are doing that and they will do that pretty well.
Speaker 2: Um And so, II, I really, I think this is
Speaker 2: a wait and see. And as one of my, and
Speaker 2: I'm not saying that I believe this is going to happen. I, I,
Speaker 2: you know, uh but you know, not to say this glibly, but,
Speaker 2: you know, India has missed a lot of opportunities, right?
Speaker 2: Uh And the question is, are we going to see
Speaker 2: a repeat of that, or is this,
Speaker 2: is this period in history right now where we have
Speaker 2: this massive paradigm shift in the West and we have
Speaker 2: all these things that we've been talking about the reorganization,
Speaker 2: the bifurcation, all of that
Speaker 2: is, is this going to put them over the hump? Right?
Speaker 2: Is this, and
Speaker 2: you know, if I'm, if I'm putting money on it,
Speaker 2: it's not good money at this point. Right. I mean,
Speaker 2: it is still a wait and see.
Speaker 1: Well, at least the window is there,
Speaker 2: is there no doubt.
Speaker 1: And now it's really up to the policymakers to come
Speaker 1: up with the right policy environment and a stable regulatory
Speaker 1: environment to to make it happen.
Speaker 1: Alexander Caffrey. This has been fantastic. Thank you very much
Speaker 1: for your time and insights.
Speaker 2: Pleasure. Enjoyed it.
Speaker 1: Great as always. Thanks to our listeners as well. Copy
Speaker 1: Time was produced by Ken Delbridge Violet, Lee and Daisy
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